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Archer-Daniels-Midland Co - Quarter Report: 2017 June (Form 10-Q)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
admprimarylogo.jpg
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
77 West Wacker Drive, Suite 4600
Chicago, Illinois
(Address of principal executive offices)
 
60601
(Zip Code)
 
 
(312) 634-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer     o 
Smaller reporting company  o
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 562,547,422 shares
(July 31, 2017)





PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
14,943

 
$
15,629

 
$
29,931

 
$
30,013

Cost of products sold
14,056

 
14,892

 
28,176

 
28,495

Gross Profit
887

 
737

 
1,755

 
1,518

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
531

 
500

 
1,052

 
979

Asset impairment, exit, and restructuring costs
23

 
12

 
33

 
25

Interest expense
86

 
65

 
167

 
135

Equity in earnings of unconsolidated affiliates
(109
)
 
(90
)
 
(281
)
 
(155
)
Interest income
(25
)
 
(23
)
 
(48
)
 
(45
)
Other (income) expense – net
(2
)
 
(134
)
 
(9
)
 
(134
)
Earnings Before Income Taxes
383

 
407

 
841

 
713

 
 
 
 
 
 
 
 
Income taxes
108

 
119

 
226

 
195

Net Earnings Including Noncontrolling Interests
275

 
288

 
615

 
518

 
 
 
 
 
 
 
 
Less: Net earnings (losses) attributable to noncontrolling interests
(1
)
 
4

 
—

 
4

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
276

 
$
284

 
$
615

 
$
514

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
571

 
591

 
574

 
593

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
574

 
594

 
576

 
595

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.48

 
$
0.48

 
$
1.07

 
$
0.87

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.48

 
$
0.48

 
$
1.07

 
$
0.87

 
 
 
 
 
 
 
 
Dividends per common share
$
0.32

 
$
0.30

 
$
0.64

 
$
0.60


See notes to consolidated financial statements.




2



Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
275

 
$
288

 
$
615

 
$
518

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
362

 
(218
)
 
383

 
(16
)
Tax effect
33

 
(10
)
 
36

 
13

Net of tax amount
395

 
(228
)
 
419

 
(3
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
7

 
15

 
19

 
16

Tax effect
(2
)
 
(3
)
 
(8
)
 
(3
)
Net of tax amount
5

 
12

 
11

 
13

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
35

 
(21
)
 
38

 
(11
)
Tax effect
(2
)
 
2

 
(5
)
 
—

Net of tax amount
33

 
(19
)
 
33

 
(11
)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
1

 
45

 
(5
)
 
12

Tax effect
—

 
(1
)
 
—

 
(3
)
Net of tax amount
1

 
44

 
(5
)
 
9

Other comprehensive income (loss)
434

 
(191
)
 
458

 
8

Comprehensive income (loss) including noncontrolling interests
709

 
97

 
1,073

 
526

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests
—

 
4

 
1

 
4

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to controlling interests
$
709

 
$
93

 
$
1,072

 
$
522


See notes to consolidated financial statements.





3



Archer-Daniels-Midland Company

Consolidated Balance Sheets
(In millions)
June 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
433

 
$
619

Short-term marketable securities
237

 
296

Segregated cash and investments
5,070

 
5,011

Trade receivables
1,717

 
1,905

Inventories
7,846

 
8,831

Other current assets
2,898

 
4,383

Total Current Assets
18,201

 
21,045

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
4,856

 
4,497

Long-term marketable securities
199

 
187

Goodwill and other intangible assets
3,866

 
3,703

Other assets
750

 
579

Total Investments and Other Assets
9,671

 
8,966

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
453

 
445

Buildings
4,872

 
4,679

Machinery and equipment
17,620

 
17,160

Construction in progress
1,227

 
1,213

 
24,172

 
23,497

Accumulated depreciation
(14,227
)
 
(13,739
)
Net Property, Plant, and Equipment
9,945

 
9,758

Total Assets
$
37,817

 
$
39,769

 
 
 
 
Liabilities, Temporary Equity, and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
353

 
$
154

Trade payables
2,926

 
3,606

Payables to brokerage customers
5,106

 
5,158

Accrued expenses and other payables
2,465

 
3,982

Current maturities of long-term debt
571

 
273

Total Current Liabilities
11,421

 
13,173

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
6,056

 
6,504

Deferred income taxes
1,606

 
1,669

Other
1,289

 
1,218

Total Long-Term Liabilities
8,951

 
9,391

 
 
 
 
Temporary Equity - Redeemable noncontrolling interest
27

 
24

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
2,376

 
2,327

Reinvested earnings
17,176

 
17,444

Accumulated other comprehensive income (loss)
(2,141
)
 
(2,598
)
Noncontrolling interests
7

 
8

Total Shareholders’ Equity
17,418

 
17,181

Total Liabilities, Temporary Equity, and Shareholders’ Equity
$
37,817

 
$
39,769

 
 
 
 
See notes to consolidated financial statements.

4



Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Six Months Ended 
 June 30,
 
2017
 
2016
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
615

 
$
518

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
 

 
 

Depreciation and amortization
452

 
452

Asset impairment charges
19

 
20

Deferred income taxes
(82
)
 
86

Equity in earnings of affiliates, net of dividends
(160
)
 
(30
)
Stock compensation expense
48

 
45

Deferred cash flow hedges
39

 
44

Gains on sales of assets and businesses/revaluation
(51
)
 
(121
)
Other – net
120

 
24

Changes in operating assets and liabilities
 

 
 

Segregated cash and investments
(113
)
 
(408
)
Trade receivables
278

 
(477
)
Inventories
1,129

 
283

Other current assets
1,413

 
(15
)
Trade payables
(757
)
 
(710
)
Payables to brokerage customers
(95
)
 
500

Accrued expenses and other payables
(1,541
)
 
(580
)
Total Operating Activities
1,314

 
(369
)
 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(452
)
 
(396
)
Proceeds from sales of business and assets
149

 
96

Net assets of businesses acquired
(180
)
 
(120
)
Purchases of marketable securities
(318
)
 
(802
)
Proceeds from sales of marketable securities
424

 
865

Investments in and advances to affiliates
(186
)
 
(464
)
Other – net
(3
)
 
8

Total Investing Activities
(566
)
 
(813
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
17

 
—

Long-term debt payments
(269
)
 
(8
)
Net borrowings (payments) under lines of credit agreements
195

 
1,454

Share repurchases
(511
)
 
(487
)
Cash dividends
(364
)
 
(353
)
Other – net
(7
)
 
(3
)
Total Financing Activities
(939
)
 
603

 
 
 
 
Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents
(191
)
 
(579
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period
688

 
1,003

Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period
$
497

 
$
424

 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets
 
 
 
 
 
 
 
Cash and cash equivalents
$
433

 
$
334

Restricted cash and restricted cash equivalents included in segregated cash and investments
64

 
90

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
$
497

 
$
424

 
 
 
 
See notes to consolidated financial statements.

5



Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Reinvested
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
573

 
$
2,327

 
$
17,444

 
$
(2,598
)
 
$
8

 
$
17,181

Impact of ASU 2016-16 (see Note 2)
 
 
 
 
(7
)
 
 
 
 
 
(7
)
Balance, January 1, 2017
573

 
$
2,327

 
$
17,437

 
$
(2,598
)
 
$
8

 
$
17,174

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 
 
 

 
615

 
 

 
—

 
 

   Other comprehensive
     income (loss)
 

 
 

 
 

 
457

 
1

 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
1,073

Cash dividends paid- $0.64 per share
 

 
 

 
(364
)
 
 

 
 

 
(364
)
Share repurchases
(12
)
 
 
 
(511
)
 
 
 
 
 
(511
)
Stock compensation expense
2

 
48

 
 

 
 

 
 

 
48

Other
—

 
1

 
(1
)
 
—

 
(2
)
 
(2
)
Balance, June 30, 2017
563

 
$
2,376

 
$
17,176

 
$
(2,141
)
 
$
7

 
$
17,418


See notes to consolidated financial statements.

6



Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements
(Unaudited)
Note 1.
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six-month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee.  The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements.  In each case, the financial statements are within 93 days of the Company’s year end and are consistent from period to period.

Reclassifications

The Company classified $17 million and $32 million of fees from its U.S. futures commission brokerage business in cost of products sold in the quarter and six months ended June 30, 2017, respectively. The current presentation is consistent with the classification of similar fees in the Company’s futures commission brokerage business in the U.K. Prior period amounts of $20 million and $35 million in the quarter and six months ended June 30, 2016, respectively, have been reclassified from selling, general, and administrative expenses in the consolidated statement of earnings to conform to the current presentation.

In the quarter ended June 30, 2017, the Company began presenting certain items (specified items) separately from the individual business segments as further described in Note 14 and Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations. Prior period amounts conform to the current presentation with no change in total segment operating profit.

Last-in, First-out (LIFO) Inventories

Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels.  Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.

Note 2.
New Accounting Standards

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 330, Inventory, which simplifies the measurement of inventory. The amended guidance requires an entity to measure its cost-based inventory at the lower of cost or net realizable value, where net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.






7
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 2.
New Accounting Standards (Continued)

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 323, Investments - Equity Method and Joint Ventures, which simplifies the transition to the equity method of accounting. The amended guidance eliminates the requirement of an investor to adjust the investment, results of operations, and retained earnings retroactively when an investment qualifies for equity method accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments require that the investor add the cost of acquiring the additional interest in the investee to the current basis of the investors’ previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The adoption of this amended guidance did not have an impact on the Company’s financial results.

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 810, Consolidation, which affects reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. The amended guidance changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The Company was required to adopt the amended guidance using a retrospective transition approach to all periods presented. The adoption of this amended guidance did not result in the deconsolidation or consolidation of any of its variable interest entities.

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 740, Income Taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer, other than inventory, when the transfer occurs.  Under the previous accounting rules, entities were prohibited from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.  The amended guidance does not change the accounting for the pre-tax effects of an intra-entity asset transfer or for an intra-entity transfer of inventory.  The Company adopted the amended guidance on a modified retrospective approach basis through a $7 million cumulative effect adjustment to retained earnings as of January 1, 2017.

Note 3.
Pending Accounting Standards

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Subtopic 825-10, Financial Instruments - Overall, which is intended to improve the recognition and measurement of financial instruments. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income and simplify the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.






















8
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards (Continued)


Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements including separate quantitative disclosure of revenues within the scope of Topic 606 and revenues excluded from the scope of Topic 606. Many of the Company’s sales contracts are considered derivatives under ASC Topic 815, Derivatives and Hedging, and are therefore excluded from the scope of Topic 606. The Company has established a cross-functional implementation team consisting of representatives from all of its business segments. The Company utilized surveys to validate all of its current revenue recognition streams and identify areas of its business where potential differences could result from applying the requirements of the new standard. The Company also conducted workshops and is currently conducting contract reviews to gather more information about the nature, magnitude, and frequency of the underlying transactions that drove the survey responses. Based on the surveys, workshops, and contract reviews, the Company identified potential accounting change in the areas of control transfer, consignment arrangements, repurchase options/rights, multiple element arrangements, voyage charter revenue, variable consideration, and principal versus agent arrangements. In the second half of the year, the Company will complete the final phase of its revenue recognition implementation plan which includes quantification of the areas of accounting change and an assessment of the financial impact of the new guidance on its consolidated financial statements.

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 805, Business Combinations, which clarifies the definition of a business. The amended guidance is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (disposals) of assets or businesses and provides a more robust framework to use in determining when a set of assets and activities is a business. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. No disclosures are required at adoption. The Company plans to adopt the amended guidance on October 1, 2017.

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component in the same line or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this amended guidance will require expanded disclosures and the reclassification of the other components of net benefit cost from cost of products sold and selling, general, and administrative expenses to other (income) expense - net in the Company’s consolidated statements of earnings but will not impact financial results.

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 718, Compensation - Stock Compensation (Topic 718), which provides clarity and reduces diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification of the terms and conditions of a share-based payment. The amendments include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.
 






9
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards (Continued)


Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842, Leases (Topic 842), which will supersede ASC Topic 840, Leases. Topic 842 requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months. The Company expects to adopt Topic 842 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from accounting, legal, procurement, and operations. The Company utilized surveys to centrally gather more information about its existing leases and lease processes and to gather lease contracts. To ensure completeness of the population of lease contracts, the results of the survey were cross-referenced against other available lease information (i.e., year-end disclosures and general ledger). The Company is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes and disclosures. The next phase of the implementation plan is the abstraction of the relevant lease contract data points which is expected to be completed in the first quarter of 2018. The impact of the new standard will be a material increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily, as a result of operating leases currently not recognized on the balance sheet. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated statement of earnings.

Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 326, Financial Instruments - Credit Losses, which is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.

Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 350, Goodwill and Other, which simplifies the subsequent measurement of goodwill. The amended guidance removes the second step of the goodwill impairment test and requires the application of a one-step quantitative test where the amount of goodwill impairment is the excess of a reporting unit's carrying amount over its fair value, but not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The impact on the Company’s financial results resulting from the adoption of the amended guidance will depend on the outcome of the goodwill impairment test on the chosen adoption date.

Note 4.
Acquisitions

During the six months ended June 30, 2017, the Company acquired Crosswind Industries, Inc., an 89% ownership stake in Biopolis SL, and Chamtor SA. The aggregate cash purchase price of these acquisitions of $180 million, net of cash acquired of $6 million, was preliminarily allocated to working capital, property, plant, and equipment, goodwill, other intangible assets, other long term assets, long-term liabilities, and noncontrolling interest for $18 million, $101 million, $21 million, $50 million, $6 million, $14 million, and $2 million, respectively.


10

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2017 and December 31, 2016.
 
 
Fair Value Measurements at June 30, 2017
 

Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Inventories carried at market
$
—

 
$
3,143

 
$
1,000

 
$
4,143

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
—

 
338

 
106

 
444

Foreign currency contracts
—

 
83

 
—

 
83

Interest rate contracts
—

 
8

 
—

 
8

Cash equivalents
22

 
—

 
—

 
22

Marketable securities
346

 
90

 
—

 
436

Segregated investments
1,492

 
—

 
—

 
1,492

Deferred receivables consideration
—

 
353

 
—

 
353

Total Assets
$
1,860

 
$
4,015

 
$
1,106

 
$
6,981

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
1

 
$
316

 
$
154

 
$
471

Foreign currency contracts
—

 
110

 
—

 
110

Inventory-related payables
—

 
329

 
32

 
361

Total Liabilities
$
1

 
$
755

 
$
186

 
$
942



11
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2016
 
 
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Inventories carried at market
$
—

 
$
3,102

 
$
1,322

 
$
4,424

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
—

 
371

 
140

 
511

Foreign exchange contracts
—

 
102

 
—

 
102

Interest rate contracts
—

 
11

 
—

 
11

Cash equivalents
286

 
—

 
—

 
286

Marketable securities
408

 
69

 
—

 
477

Segregated investments
1,613

 
—

 
—

 
1,613

Deferred receivables consideration
—

 
540

 
—

 
540

Total Assets
$
2,307

 
$
4,195

 
$
1,462

 
$
7,964

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
419

 
$
142

 
$
561

Foreign exchange contracts
—

 
90

 
—

 
90

Inventory-related payables
—

 
491

 
30

 
521

Total Liabilities
$
—

 
$
1,000

 
$
172

 
$
1,172


Estimated fair values for inventories carried at market are based on exchange-quoted prices adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets.  Market valuations for the Company’s inventories are adjusted for location and quality because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. When unobservable inputs have a significant impact on the measurement of fair value, the inventory is classified in Level 3. Changes in the fair value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.


12
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies.  Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1.  The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables.  Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets.  These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.  When observable inputs are available for substantially the full term of the contract, it is classified in Level 2.  When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold.  Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, or other (income) expense – net depending upon the purpose of the contract. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified as Level 1.

The Company’s marketable securities are comprised of equity investments, U.S. Treasury securities, corporate debt securities, and other debt securities.  Publicly traded equity investments and U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.  Corporate debt and other debt securities are valued using third-party pricing services and substantially all are classified in Level 2. Unrealized changes in the fair value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.

The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 16). This amount is reflected in other current assets on the consolidated balance sheet (see Note 8). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs, which have historically been insignificant.


13
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2017.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2017
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2017
$
1,129

 
$
173

 
$
1,302

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
157

 
71

 
228

Purchases
2,329

 
—

 
2,329

Sales
(2,677
)
 
—

 
(2,677
)
Settlements
—

 
(140
)
 
(140
)
Transfers into Level 3
115

 
19

 
134

Transfers out of Level 3
(53
)
 
(17
)
 
(70
)
Ending balance, June 30, 2017
$
1,000

 
$
106

 
$
1,106


* Includes increase in unrealized gains of $148 million relating to Level 3 assets still held at June 30, 2017.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2017.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2017
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2017
$
28

 
$
123

 
$
151

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
(9
)
 
81

 
72

Purchases
16

 
—

 
16

Sales
(3
)
 
—

 
(3
)
Settlements
—

 
(98
)
 
(98
)
Transfers into Level 3
—

 
49

 
49

Transfers out of Level 3
—

 
(1
)
 
(1
)
Ending balance, June 30, 2017
$
32

 
$
154

 
$
186


* Includes decrease in unrealized losses of $85 million relating to Level 3 liabilities still held at June 30, 2017.


14
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2016.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2016
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2016
$
969

 
$
218

 
$
1,187

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(105
)
 
32

 
(73
)
Purchases
2,686

 
—

 
2,686

Sales
(2,506
)
 
—

 
(2,506
)
Settlements
—

 
(120
)
 
(120
)
Transfers into Level 3
79

 
34

 
113

Transfers out of Level 3
(24
)
 
(11
)
 
(35
)
Ending balance, June 30, 2016
$
1,099

 
$
153

 
$
1,252


* Includes decrease in unrealized gains of $3 million relating to Level 3 assets still held at June 30, 2016.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2016
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2016
$
23

 
$
111

 
$
134

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
(11
)
 
417

 
406

Purchases
1

 
—

 
1

Sales
(1
)
 
—

 
(1
)
Settlements
—

 
(73
)
 
(73
)
Transfers into Level 3
—

 
67

 
67

Transfers out of Level 3
—

 
(22
)
 
(22
)
Ending balance, June 30, 2016
$
12

 
$
500

 
$
512


* Includes increase in unrealized losses of $419 million relating to Level 3 liabilities still held at June 30, 2016.



15
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2017.
 
Level 3 Fair Value Asset Measurements at
 
June 30, 2017
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2016
$
1,322

 
$
140

 
$
1,462

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(90
)
 
140

 
50

Purchases
5,577

 
—

 
5,577

Sales
(5,871
)
 
—

 
(5,871
)
Settlements
—

 
(209
)
 
(209
)
Transfers into Level 3
115

 
66

 
181

Transfers out of Level 3
(53
)
 
(31
)
 
(84
)
Ending balance, June 30, 2017
$
1,000

 
$
106

 
$
1,106


* Includes decrease in unrealized gains of $34 million relating to Level 3 assets still held at June 30, 2017.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2017.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2017
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2016
$
30

 
$
142

 
$
172

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
5

 
119

 
124

Purchases
17

 
—

 
17

Sales
(20
)
 
—

 
(20
)
Settlements
—

 
(166
)
 
(166
)
Transfers into Level 3
—

 
73

 
73

Transfers out of Level 3
—

 
(14
)
 
(14
)
Ending balance, June 30, 2017
$
32

 
$
154

 
$
186


* Includes decrease in unrealized losses of $124 million relating to Level 3 liabilities still held at June 30, 2017.




16
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2016.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2016
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2015
$
1,004

 
$
243

 
$
1,247

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(155
)
 
94

 
(61
)
Purchases
5,042

 
—

 
5,042

Sales
(4,743
)
 
—

 
(4,743
)
Settlements
—

 
(217
)
 
(217
)
Transfers into Level 3
79

 
66

 
145

Transfers out of Level 3
(128
)
 
(33
)
 
(161
)
Ending balance, June 30, 2016
$
1,099

 
$
153

 
$
1,252


*Includes increase in unrealized gains of $14 million relating to Level 3 assets still held at June 30, 2016.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2016
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2015
$
16

 
$
113

 
$
129

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
2

 
496

 
498

Purchases
2

 
—

 
2

Sales
(8
)
 
—

 
(8
)
Settlements
—

 
(146
)
 
(146
)
Transfers into Level 3
—

 
83

 
83

Transfers out of Level 3
—

 
(46
)
 
(46
)
Ending balance, June 30, 2016
$
12

 
$
500

 
$
512


*Includes increase in unrealized losses of $498 million relating to Level 3 assets still held at June 30, 2016.


17
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

For all periods presented, the Company had no transfers between Level 1 and 2. Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.

In some cases, the price components that result in differences between exchange-traded prices and local prices for inventories and commodity purchase and sale contracts are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments are referred to as Basis. The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices also impact the movement of these unobservable price components.

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of June 30, 2017 and December 31, 2016. The Company’s Level 3 measurements may include Basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with Basis, the unobservable component as of June 30, 2017 is a weighted average 12.6% of the total price for assets and 53.9% of the total price for liabilities.

 
Weighted Average % of Total Price
 
June 30, 2017
 
December 31, 2016
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
12.6
%
 
53.9
%
 
16.5
%
 
67.1
%
Transportation cost
16.1
%
 
17.8
%
 
8.3
%
 
—

 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
19.7
%
 
27.5
%
 
16.9
%
 
27.0
%
Transportation cost
6.8
%
 
9.6
%
 
11.6
%
 
13.4
%

In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, absent other corroborating evidence, the Company considers these price quotes as 100% unobservable and, therefore, the fair value of these items is reported in Level 3.


18

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities

Derivatives Not Designated as Hedging Instruments

The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value and inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
  
The following table sets forth the fair value of derivatives not designated as hedging instruments as of June 30, 2017 and December 31, 2016.

 
June 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
 
 
 
 
 
 
 
Foreign Currency Contracts
$
83

 
$
110

 
$
102

 
$
90

Commodity Contracts
444

 
471

 
511

 
561

Total
$
527

 
$
581

 
$
613

 
$
651


The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three and six months ended June 30, 2017 and 2016.

 
Three months ended June 30,
 
2017
 
2016
 
(In millions)
Foreign Currency Contracts
 

 
 

Revenues
$
3

 
$
(13
)
Cost of products sold
(30
)
 
155

Other income (expense) – net
133

 
(104
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
1

 
(625
)
Total gain (loss) recognized in earnings
$
107

 
$
(587
)

19
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

 
Six months ended June 30,
 
2017
 
2016
 
(In millions)
Foreign Currency Contracts
 

 
 

Revenues
$
(8
)
 
$
(13
)
Cost of products sold
30

 
262

Other income (expense) – net
134

 
(105
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
260

 
$
(635
)
Total gain (loss) recognized in earnings
$
416

 
$
(491
)

Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of June 30, 2017 and December 31, 2016, the Company has certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At June 30, 2017, the Company has $8 million in other current assets representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no impact to earnings.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  Assuming normal market conditions, the changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable.
The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 76 million bushels of corn per month.  During the past 12 months, the Company hedged between 19% and 62% of its monthly anticipated grind.  At June 30, 2017, the Company has designated hedges representing between 1% and 34% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 1 million and 66 million gallons of ethanol sales per month under these programs.  At June 30, 2017, the Company has designated hedges representing between 0 and 1 million gallons of ethanol sales per month over the next 12 months.


20
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

The following table sets forth the fair value of derivatives designated as hedging instruments as of June 30, 2017 and December 31, 2016.

 
June 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
Interest Rate Contracts
$
8

 
$
—

 
$
11

 
$
—

Total
$
8

 
$
—

 
$
11

 
$
—


The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and six months ended June 30, 2017 and 2016.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2017
 
2016
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
Foreign Currency Contracts
Other income/expense – net
 
$
—

 
$
(8
)
Commodity Contracts
Revenues
 
1

 
(6
)
 
Cost of products sold
 
(6
)
 
(5
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
—

 
(1
)

Cost of products sold
 
4

 
2

Total amount recognized in earnings
 
 
$
(1
)
 
$
(18
)
 
 
 
Six months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2017
 
2016
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
Foreign Currency Contracts
Other income/expense – net
 
$
(2
)
 
$
(22
)
Commodity Contracts
Revenues
 
—

 
(5
)

Cost of products sold
 
(5
)
 
(24
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
4

 
1


Cost of products sold
 
9

 
4

Total amount recognized in earnings
 
 
$
6

 
$
(46
)

Hedge ineffectiveness for commodity contracts results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship.  As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn grind occurs.  If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to when the corn grind occurs.



21
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

Net Investment Hedging Strategies

On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes and €600 million aggregate principal amount of 1.75% Notes (collectively, the “Notes”). The Company has designated €1.1 billion of the Notes as a hedge of its net investment in a foreign subsidiary. As of June 30, 2017, the Company has $20 million of after-tax losses in AOCI related to gains and losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.
Note 7.
Marketable Securities

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
234

 
$
—

 
$
—

 
$
234

Maturity 1 to 5 years
112

 
—

 
—

 
112

Corporate debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
3

 
—

 
—

 
3

Maturity 1 to 5 years
87

 
—

 
—

 
87

 
$
436

 
$
—

 
$
—

 
$
436


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
287

 
$
—

 
$
—

 
$
287

Maturity 1 to 5 years
121

 
—

 
(1
)
 
120

Corporate debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
1

 
—

 
—

 
1

Maturity 1 to 5 years
66

 
—

 
—

 
66

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
8

 
—

 
—

 
8

Equity securities
 

 
 

 
 

 
 

Available-for-sale
1

 
—

 
—

 
1

 
$
484

 
$
—

 
$
(1
)
 
$
483





22

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 8.     Other Current Assets

The following table sets forth the items in other current assets:

 
June 30,
 
December 31,
 
2017
 
2016
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
535

 
$
624

Deferred receivables consideration
353

 
540

Customer omnibus receivable
430

 
521

Financing receivables - net (1)
351

 
373

Insurance premiums receivable
52

 
648

Prepaid expenses
285

 
268

Tax receivables
347

 
480

Non-trade receivables (2)
370

 
478

Other current assets
175

 
451

 
$
2,898

 
$
4,383


(1) The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of $7 million at June 30, 2017 and December 31, 2016. Interest earned on financing receivables of $5 million and $12 million for the three and six months ended June 30, 2017, respectively, and $4 million and $12 million for the three and six months ended June 30, 2016, respectively, is included in interest income in the consolidated statements of earnings.

(2) Non-trade receivables include $58 million and $223 million of reinsurance recoverables as of June 30, 2017 and December 31, 2016, respectively.

Note 9.     Accrued Expenses and Other Payables

The following table sets forth the items in accrued expenses and other payables:

 
June 30,
 
December 31,
 
2017
 
2016
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
581

 
$
651

Reinsurance premiums payable
13

 
479

Insurance claims payables
245

 
373

Deferred income
366

 
1,065

Other accruals and payable
1,260

 
1,414

 
$
2,465

 
$
3,982



23

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 10.
Debt and Financing Arrangements

At June 30, 2017, the fair value of the Company’s long-term debt exceeded the carrying value by $1.1 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At June 30, 2017, the Company had lines of credit, including the accounts receivable securitization programs, totaling $6.7 billion, of which $5.1 billion was unused.  Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was $0.2 billion of commercial paper outstanding at June 30, 2017.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.5 billion in funding resulting from the sale of accounts receivable. As of June 30, 2017, the Company utilized $1.2 billion of its facility under the Programs (see Note 16 for more information on the Programs).

Note 11.
Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2017 was 28.2% and 26.9%, respectively, compared to 29.2% and 27.3% for the three and six months ended June 30, 2016, respectively. The change in the rates was primarily due to changes in the forecasted geographic mix of pre-tax earnings and the effect of certain discrete adjustments, partially offset by the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.

The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due.  These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions.  Resolution of the related tax positions, through negotiation with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard.  However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), has received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. As of June 30, 2017, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $464 million. The statute of limitations for tax years 2005 and 2008 to 2011 has expired. The Company does not expect to receive any additional tax assessments.

ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.

ADM do Brasil filed an administrative appeal for each of the assessments. The appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue with the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, the Company intends to file appeals in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.

The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2011.



24
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 11.     Income Taxes (Continued)

The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $130 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 through 2010. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2010, and estimates that these potential assessments would be approximately $210 million (as of June 30, 2017 and subject to variation in currency exchange rates).  The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2010.
  
In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for these assessments because it has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits and because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.

The Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., has received a tax assessment totaling $103 million from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization which involved two of its subsidiary companies in the Netherlands. The Company has appealed the assessment and carefully evaluated the underlying transactions and has concluded that the amount of the gain recognized on the reorganization for tax purposes was appropriate. While the Company plans to vigorously defend its position against the assessment, it has accrued an amount it believes would be the likely outcome of the litigation. The Company’s defense of the judicial appeal may take an extended period of time, and could result in additional financial impacts of up to the entire amount of this assessment.


25

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 12.     Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component for the three and six months ended June 30, 2017 and the reclassifications out of AOCI for the three and six months ended June 30, 2017 and 2016:
 
Three months ended June 30, 2017
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
$
(2,078
)
 
$
6

 
$
(515
)
 
$
13

 
$
(2,574
)
Other comprehensive income (loss) before reclassifications
361

 
30

 
(6
)
 
1

 
386

Amounts reclassified from AOCI
—

 
5

 
13

 
—

 
18

Tax effect
33

 
(2
)
 
(2
)
 
—

 
29

Net current period other comprehensive income
394

 
33

 
5

 
1

 
433

Balance at June 30, 2017
$
(1,684
)
 
$
39

 
$
(510
)
 
$
14

 
$
(2,141
)
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(2,102
)
 
$
6

 
$
(521
)
 
$
19

 
$
(2,598
)
Other comprehensive income before reclassifications
382

 
31

 
(9
)
 
(5
)
 
399

Amounts reclassified from AOCI
—

 
7

 
28

 
—

 
35

Tax effect
36

 
(5
)
 
(8
)
 
—

 
23

Net current period other comprehensive income
418

 
33

 
11

 
(5
)
 
457

Balance at June 30, 2017
$
(1,684
)
 
$
39

 
$
(510
)
 
$
14

 
$
(2,141
)


26
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 12.     Accumulated Other Comprehensive Income (AOCI) (Continued)

 
 
Amount reclassified from AOCI
 
 
 
 
Three months ended
 
Six months ended
 
 
Details about AOCI components
 
June 30,
2017
 
June 30,
2016
 
June 30
2017
 
June 30
2016
 
Affected line item in the consolidated statement of earnings
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
(73
)
 
$
—

 
$
(73
)
 
Other income/expense
 
 
—

 
—

 
—

 
—

 
Tax
 
 
$
—

 
$
(73
)
 
$
—

 
$
(73
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Deferred loss (gain) on hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
$
6

 
$
5

 
$
5

 
$
24

 
Cost of products sold
 
 
—

 
8

 
2

 
22

 
Other income/expense
 
 
(1
)
 
6

 
—

 
5

 
Revenues
 
 
5

 
19

 
7

 
51

 
Total before tax
 
 
(2
)
 
(8
)
 
(3
)
 
(19
)
 
Tax
 
 
$
3

 
$
11

 
$
4

 
$
32

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Pension liability adjustment
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
(3
)
 
$
(3
)
 
$
(6
)
 
$
(7
)
 
Selling, general, and administrative expenses
Actuarial losses
 
16

 
15

 
34

 
29

 
Selling, general, and administrative expenses
 
 
13

 
12

 
28

 
22

 
Total before tax
 
 
(4
)
 
(2
)
 
(10
)
 
(3
)
 
Tax
 
 
$
9

 
$
10

 
$
18

 
$
19

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 

27

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 13.
Other (Income) Expense - Net

The following table sets forth the items in other (income) expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
(Gains) losses on sales of assets and businesses
$
(35
)
 
$
(121
)
 
$
(51
)
 
$
(124
)
Other – net
33

 
(13
)
 
42

 
(10
)
Other (Income) Expense - Net
$
(2
)
 
$
(134
)
 
$
(9
)
 
$
(134
)

Gains on sales of assets and businesses for the three and six months ended June 30, 2017 include gains related to the sale of the crop risk services business and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business. Gains on sales of assets and businesses for the three and six months ended June 30, 2016 included realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B. de C.V. in December 2012, recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors.

Other - net for the three and six months ended June 30, 2017 includes foreign exchange losses and changes in contingent settlement provisions. Other - net for the three and six months ended June 30, 2016 included foreign exchange gains and other income.

Note 14.     Segment Information

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company’s operations are organized, managed, and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other.

The Agricultural Services segment utilizes its extensive global grain elevator and transportation networks, and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Agricultural Services segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. Agricultural Services’ grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include barge, ocean-going vessel, truck, rail, and container freight services. The Agricultural Services segment also includes the activities related to structured trade finance, the processing of wheat into wheat flour, and the Company’s share of the results of its Pacificor (formerly Kalama Export Company LLC) joint venture. The Agricultural Services segment also included returns associated with the Company’s 19.8% investment in GrainCorp until its sale in December 2016.












28
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 14.
Segment Information (Continued)

The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, utilizing its asset base primarily located in the central part of the United States with additional facilities in China, Bulgaria, France, Morocco, Spain, and Turkey. The Corn Processing segment converts corn into sweeteners, starches, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose. Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Bioproducts also include essential amino acids such as lysine and threonine used in swine and poultry diets to optimize performance. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. The Corn Processing segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products. Other Corn Processing products include citric acids and glycols, all of which are used in various food and industrial products. The Corn Processing segment also included the activities of the Company’s Brazilian sugarcane ethanol plant and related operations until the Company completed the sale of these operations in May 2016. This segment also includes the Company’s share of the results of its equity investments in Almidones Mexicanos S.A. and Red Star Yeast Company LLC. In February 2017, the Company acquired Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and foods, as well as specialty ingredients, and an 89% ownership stake in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients. In June 2017, the Company completed the acquisition of Chamtor SA, a French producer of wheat-based sweeteners and starches.
 
The Oilseeds Processing segment includes global activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and industrial products industries. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds Processing segment is a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and other industrial markets. The Oilseeds Processing segment also includes the Company’s share of the results of its equity investment in Wilmar International Limited (Wilmar) and its share of the results of its Stratas Foods LLC, Edible Oils Limited, and Olenex joint ventures. During the six months ended June 30, 2017, the Company acquired additional shares in Wilmar, increasing its ownership interest from 23.2% to 24.3% as of June 30, 2017.

The Wild Flavors and Specialty Ingredients (WFSI) segment engages in the manufacturing, sales, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The WFSI segment also includes the activities related to the procurement, processing, and distribution of edible beans.

Other includes the Company’s remaining operations, primarily its financial business units, related to futures commission and insurance activities. On May 1, 2017, the Company completed the sale of its crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies.

Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses and specified items. Also included in operating profit for each segment is equity in earnings of affiliates based on the equity method of accounting. Specified items included in total segment operating profit and certain corporate items are not allocated to the Company’s individual business segments because operating performance of each business segment is evaluated exclusive of these items. Corporate results principally include the impact of LIFO-related adjustments, unallocated corporate expenses, interest cost net of investment income, and the Company’s share of the results of its equity investment in Compagnie Industrialle et Financiere des Produits Amylaces SA (Luxembourg) (CIP).

29
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 14.
Segment Information (Continued)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Gross revenues
 
 
 
 
 
 
 
Agricultural Services
$
6,594

 
$
7,098

 
$
14,329

 
$
14,533

Corn Processing
2,455

 
2,549

 
4,801

 
4,940

Oilseeds Processing
7,161

 
7,195

 
13,312

 
12,920

Wild Flavors and Specialty Ingredients
656

 
684

 
1,223

 
1,279

Other
101

 
111

 
195

 
219

Intersegment elimination
(2,024
)
 
(2,008
)
 
(3,929
)
 
(3,878
)
Total gross revenues
$
14,943

 
$
15,629

 
$
29,931

 
$
30,013

 
 
 
 
 
 
 
 
Intersegment sales
 

 
 

 
 

 
 

Agricultural Services
$
746

 
$
711

 
$
1,675

 
$
1,666

Corn Processing
181

 
197

 
283

 
381

Oilseeds Processing
1,089

 
1,096

 
1,958

 
1,824

Wild Flavors and Specialty Ingredients
8

 
4

 
13

 
7

Total intersegment sales
$
2,024

 
$
2,008

 
$
3,929

 
$
3,878

 
 
 
 
 
 
 
 
Revenues from external customers
 

 
 

 
 

 
 

Agricultural Services
 
 
 
 
 
 
 
Merchandising and Handling
$
5,099

 
$
5,506

 
$
11,169

 
$
11,185

Milling and Other
698

 
825

 
1,384

 
1,571

Transportation
51

 
56

 
101

 
111

Total Agricultural Services
5,848

 
6,387

 
12,654

 
12,867

Corn Processing
 
 
 
 
 
 
 
Sweeteners and Starches
1,077

 
1,037

 
2,105

 
2,004

Bioproducts
1,197

 
1,315

 
2,413

 
2,555

Total Corn Processing
2,274

 
2,352

 
4,518

 
4,559

Oilseeds Processing
 
 
 
 
 
 
 
Crushing and Origination
3,911

 
4,033

 
7,185

 
7,139

Refining, Packaging, Biodiesel, and Other
2,094

 
2,041

 
4,039

 
3,810

Asia
67

 
25

 
130

 
147

Total Oilseeds Processing
6,072

 
6,099

 
11,354

 
11,096

 
 
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
648

 
680

 
1,210

 
1,272

Total Wild Flavors and Specialty Ingredients
648

 
680

 
1,210

 
1,272

 
 
 
 
 
 
 
 
Other - Financial
101

 
111

 
195

 
219

Total Other
101

 
111

 
195

 
219

Total revenues from external customers
$
14,943

 
$
15,629

 
$
29,931

 
$
30,013

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

30
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 14.
Segment Information (Continued)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Segment operating profit
 
 
 
 
 
 
 
Agricultural Services
$
109

 
$
57

 
197

 
133

Corn Processing
224

 
163

 
395

 
292

Oilseeds Processing
206

 
235

 
520

 
496

Wild Flavors and Specialty Ingredients
92

 
94

 
167

 
164

Other
27

 
24

 
57

 
61

Specified Items:
 
 
 
 
 
 
 
Gains (losses) on sales of assets and businesses1
8

 
118

 
8

 
118

Impairment, restructuring, settlement charges2
(26
)
 
(10
)
 
(35
)
 
(12
)
Hedge timing effects3
2

 
(1
)
 
9

 
1

Total segment operating profit
642

 
680

 
1,318

 
1,253

Corporate
(259
)
 
(273
)
 
(477
)
 
(540
)
Earnings before income taxes
$
383

 
$
407

 
$
841

 
$
713

 
 
 
 
 
 
 
 

1 Current period gain related to the sale of the crop risk services business partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business. Prior period gain primarily related to recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, realized contingent consideration on the sale of the Company’s equity investment in Gruma S.A. de C.V. in December 2012, and revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors.

2 Current quarter and year to date charges related to impairment of certain long-lived assets, restructuring charges, and a settlement charge. Prior quarter and YTD charges primarily related to impairment of certain long-lived assets and restructuring charges.

3 Hedge timing effects relate to hedge ineffectiveness associated with documented hedge programs.

Note 15.     Asset Impairment, Exit, and Restructuring Costs

Asset impairment, exit, and restructuring costs in the quarter ended June 30, 2017 consisted of $7 million of asset impairments in the Agricultural Services segment, $6 million of asset impairments in the WFSI segment, $4 million of other individually insignificant asset impairments, and $6 million of restructuring charges. Asset impairment, exit, and restructuring costs in the six months ended June 30, 2017 consisted of $8 million of asset impairments and $7 million of restructuring charges in the Agricultural Services segment, $6 million of asset impairments in the WFSI segment, $5 million of other individually insignificant asset impairments, and $7 million of other restructuring charges.

Asset impairment, exit, and restructuring costs in the quarter ended June 30, 2016 consisted of $5 million of asset impairments in the Corn Processing segment and $7 million of other individually insignificant asset impairments and restructuring charges. Asset impairment, exit, and restructuring costs in the six months ended June 30, 2016 consisted of $11 million of software impairment in Corporate, $5 million of asset impairments in the Corn Processing segment, and $9 million of other individually insignificant asset impairments and restructuring charges.
 
Note 16.     Sale of Accounts Receivable

Since March 2012, the Company has had an accounts receivable securitization program (the “Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Purchasers”). Under the Program, certain U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Receivables, LLC (“ADM Receivables”). ADM Receivables in turn transfers such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Receivables receives a cash payment of up to $1.2 billion, as amended, and an additional amount upon the collection of the accounts receivable (deferred consideration). The Program terminates on June 22, 2018, unless extended.

31
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 16.     Sale of Accounts Receivable (Continued)

In March 2014, the Company entered into a second accounts receivable securitization program (the “Second Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Second Purchasers”). Under the Second Program, certain non-U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Ireland Receivables Company (“ADM Ireland Receivables”). ADM Ireland Receivables in turn transfers such purchased accounts receivable in their entirety to the Second Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Ireland Receivables receives a cash payment of up to $0.3 billion and an additional amount upon the collection of the accounts receivable (deferred consideration). The Second Program terminates on March 16, 2018, unless extended.

Under the Program and Second Program (collectively, the “Programs”), ADM Receivables and ADM Ireland Receivables use the cash proceeds from the transfer of receivables to the Purchasers and Second Purchasers and other consideration to finance the purchase of receivables from the Company and the ADM subsidiaries originating the receivables.

The Company accounts for these transfers as sales. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred consideration. At June 30, 2017 and December 31, 2016, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.

As of June 30, 2017 and December 31, 2016, the fair value of trade receivables transferred to the Purchasers and Second Purchasers under the Programs and derecognized from the Company’s consolidated balance sheet was $1.6 billion. In exchange for the transfer as of June 30, 2017 and December 31, 2016, the Company received cash of $1.2 billion and $1.0 billion and recorded a receivable for deferred consideration included in other current assets of $353 million and $540 million, respectively. Cash collections from customers on receivables sold were $16.5 billion and $16.1 billion for the six months ended June 30, 2017 and 2016, respectively. Of this amount, $16.5 billion and $16.0 billion pertain to cash collections on the deferred consideration for the six months ended June 30, 2017 and 2016, respectively. Deferred consideration is paid to the Company in cash on behalf of the Purchasers as receivables are collected; however, as this is a revolving facility, cash collected from the Company’s customers is reinvested by the Purchasers daily in new receivable purchases under the Program.

The Company’s risk of loss following the transfer of accounts receivable under the Program is limited to the deferred consideration outstanding. The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received and is principally based on observable inputs (a Level 2 measurement under the applicable accounting standards) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.

Transfers of receivables under the Programs resulted in an expense for the loss on sale of $2 million and $1 million during the three months ended June 30, 2017 and 2016, respectively, and $4 million and $2 million for the six months ended June 30, 2017 and 2016, respectively, classified as selling, general, and administrative expenses in the consolidated statements of earnings.
  
The Company reflects all cash flows related to the Programs as operating activities in its consolidated statement of cash flows for the six months ended June 30, 2017 and 2016 because the cash received from the Purchasers and Second Purchasers upon both the sale and collection of the receivables is not subject to significantly different risks given the short-term nature of the Company’s trade receivables.












32

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 17.     Subsequent Events

On July 19, 2017, the Company announced that it has completed the acquisition of a 51% controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which will now be known as ADM Israel, for $10 million.

In July 2017, the Company announced that it is reconfiguring its Peoria, Illinois ethanol complex to focus on the more profitable high grade industrial and beverage alcohol as well as export fuel. Also in July 2017, the Company announced that as part of Project Readiness, it is reducing certain positions within its global workforce following a detailed review of its structure, organizational levels, spans of controls, degree of centralization of activities, organization of various staff activities, and leadership. The Company expects to record restructuring and impairment charges of approximately $80 million to $100 million pre-tax related to these actions in the third quarter of 2017.

On July 31, 2017, the Company announced a change to its U.S. salaried employee defined benefit pension plan (the ADM Retirement Plan). Effective December 31, 2021, the accrued pension benefits of active traditional formula plan participants will be frozen. Effective January 1, 2022, the impacted participants will begin participating in the Company’s existing cash-balance pension plan formula for future benefit accruals. Due to the significance of this plan amendment, the Company will be undertaking a plan remeasurement in the third quarter of 2017.


33

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 163 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for its shareholders, principally from margins earned on these activities.

The Company’s operations are organized, managed and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other. See Note 14 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information about the Company’s business segments.

The Company’s recent significant portfolio actions and announcements include:

•
the acquisition in February 2017 of Crosswind Industries, Inc., an industry leader in the manufacture of contract and private label pet treats and foods, as well as specialty ingredients;
•
the acquisition in February 2017 of an 89% ownership stake in Biopolis SL, a leading provider of microbial technology with a strong portfolio of novel food ingredients;
•
the construction of a new feed-premix facility in Xiangtan, China, which is expected to be completed in 2019;
•
the sale in May 2017 of the Company's crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies;
•
the completion in May 2017 of a series of major enhancements at the Company’s export terminal in Santos, in the Brazilian state of Sao Paulo;
•
the construction of a new flour mill in Mendota, Illinois, which is expected to be completed in 2019;
•
the expansion of a Golden Peanut and Tree Nuts production facility in Blakely, Georgia, which is expected to be completed in 2018;
•
the completion of a new silo located on the Danube River in Silistra, Bulgaria;
•
the acquisition in June 2017 of Chamtor, a French producer of wheat-based sweeteners and starches; and
•
the acquisition in July 2017 of a controlling interest in Industries Centers, an Israeli company specializing in the import and distribution of agricultural feed products, which will now be known as ADM Israel.

As part of the implementation of the Company’s strategic plan, the Company continues to evaluate the capital intensity of its operations and portfolio, seeking ways to reduce and redeploy capital in its efforts to drive long-term returns.

Operating Performance Indicators

The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company’s agricultural services and oilseeds processing operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. Therefore, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Thus, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit.

The Company’s corn processing operations and Wild Flavors and Specialty Ingredients businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily equal changes in cost of products sold. Thus, changes in revenues of these businesses may correspond to changes in margins or gross profit.




34


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company has consolidated subsidiaries in 76 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require conversion to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.

The Company measures its performance using key financial metrics including net earnings, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Market Factors Influencing Operations or Results in the Three Months Ended June 30, 2017

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. Agricultural Services was impacted by weak U.S. grain export competitiveness. Overall low market volatility continued due to surplus in the global market. In Corn Processing, demand and prices for sweeteners and starches remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, U.S. industry ethanol production also remained at high levels, limiting margins. Global oilseeds crushed record volumes, although soy margins remained under pressure due to aggressive Argentina competition and slow meal demand growth due to competing proteins. Slow selling by farmers in Brazil continues to depress grain origination margins despite strong export volumes. Demand and margins for refined oil remained solid across all regions. Wild Flavors and Specialty Ingredients benefited from strong demand for flavor ingredients and flavor systems, specialty proteins, and edible bean products, but continued to be adversely affected by soft market conditions in certain non-flavor food ingredient markets.

Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Net earnings attributable to controlling interests was $276 million in the second quarter of 2017 compared to $284 million in the second quarter of 2016. Segment operating profit was $642 million in the second quarter of 2017 compared to $680 million in the second quarter of 2016. Included in segment operating profit in the current quarter is a net charge of $16 million consisting of a net gain on sales of businesses, impairment, restructuring, and settlement charges, and corn hedge timing effects. Included in segment operating profit in the prior year quarter is income of $107 million consisting of a net gain on sales of assets and businesses/revaluation, impairment, restructuring, and settlement charges, and corn hedge timing effects. Adjusted segment operating profit increased $85 million to $658 million due to improved global merchandising results and solid results in Corn Processing, partially offset by weaker South American origination margins, lower soybean crush margins, and weaker results in some specialty ingredients. Corporate results were a charge of $259 million this quarter compared to $273 million in last year’s quarter. Corporate results this quarter included a charge of $9 million from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves, compared to a charge of $88 million in the second quarter of 2016.

Income taxes decreased $11 million to $108 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for the quarter ended June 30, 2017 decreased to 28.2% compared to 29.2% for the quarter ended June 30, 2016, primarily due to the forecasted geographic mix of pre-tax earnings and the effect of certain discrete adjustments, partially offset by the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.









35


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Analysis of Statements of Earnings

Processed volumes by product for the quarter are as follows (in metric tons):
 
Three Months Ended
 
 
June 30,
 
 
(In thousands)
2017
 
2016
 
Change
Oilseeds
8,518

 
8,468

 
50

Corn
5,840

 
5,087

 
753

   Total
14,358

 
13,555

 
803


The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. The overall increase in corn relates to the strong demand environment for ethanol.

Revenues by segment for the quarter are as follows:
 
Three Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
Change
 
(In millions)
Agricultural Services
 
 
 
 
 
Merchandising and Handling
$
5,099

 
$
5,506

 
$
(407
)
Milling and Other
698

 
825

 
(127
)
Transportation
51

 
56

 
(5
)
Total Agricultural Services
5,848

 
6,387

 
(539
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
1,077

 
1,037

 
40

Bioproducts
1,197

 
1,315

 
(118
)
Total Corn Processing
2,274

 
2,352

 
(78
)
 
 
 
 
 
 
Oilseeds Processing
 

 
 

 
 

Crushing and Origination
3,911

 
4,033

 
(122
)
Refining, Packaging, Biodiesel, and Other
2,094

 
2,041

 
53

Asia
67

 
25

 
42

Total Oilseeds Processing
6,072

 
6,099

 
(27
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
648

 
680

 
(32
)
Total Wild Flavors and Specialty Ingredients
648

 
680

 
(32
)
 
 
 
 
 
 
Other - Financial
101

 
111

 
(10
)
Total Other
101

 
111

 
(10
)
Total
$
14,943

 
$
15,629

 
$
(686
)





36


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.

Revenues decreased $0.7 billion to $14.9 billion due to lower average sales prices ($0.7 billion), including $0.1 billion from foreign currency translation impacts. The decrease in sales prices was due principally to a decrease in underlying agricultural commodity prices, in particular prices of soybeans, corn, meal, and wheat. Agricultural Services revenues decreased 8% to $5.8 billion due to lower sales volumes ($0.2 billion) and lower average sales prices ($0.3 billion). Corn Processing revenues decreased 3% to $2.3 billion due to lower average sales prices ($0.1 billion). Oilseeds Processing revenues of $6.1 billion were in line with the prior year’s quarter with lower average sales prices ($0.2 billion) offset by higher sales volumes ($0.2 billion). Wild Flavors and Specialty Ingredients revenues of $0.6 billion were in line with the prior year’s quarter.
  
Cost of products sold decreased $0.8 billion to $14.1 billion due principally to lower average commodity prices, including $0.1 billion from foreign currency translation impacts. Included in cost of products sold during this quarter is a charge of $9 million from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $88 million in the prior year’s quarter. Manufacturing expenses increased $0.1 billion to $1.3 billion due to higher salaries and benefits and increased expenses for gas and operating and maintenance supplies.

Gross profit increased $0.2 billion to $0.9 billion. The increase in gross profit consists principally of higher results in merchandising and handling ($61 million), sweeteners and starches ($12 million), ethanol ($33 million), biodiesel ($45 million) and peanuts ($12 million), partially offset by lower results in soybean processing ($85 million). These factors are explained in the segment operating profit discussion starting on page 39. Current period gross profit includes a charge of $9 million from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $88 million during the same period last year. The decrease in underlying commodity prices from the prior year quarter did not result in a significant decrease in margins or gross profit as lower underlying commodity prices had a relatively equal impact on revenues and cost of products sold.

Selling, general, and administrative expenses increased $31 million to $531 million due principally to higher salaries and benefits cost related to increased investments in the Company’s business transformation, IT, and innovation initiatives and higher bonus accruals.

Asset impairment, exit, and restructuring charges increased $11 million to $23 million. Current period charges consisted of $7 million of asset impairments in the Agricultural Services segment, $6 million of asset impairments in the WFSI segment, $4 million of other individually insignificant asset impairments, and $6 million of restructuring charges. Prior period charges included $5 million of asset impairments in the Corn Processing segment and $7 million of other individually insignificant asset impairments and restructuring charges.

Interest expense increased $21 million to $86 million due principally to higher interest rates on short-term debt, the issuance of the $1 billion fixed-rate notes in August 2016, and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Interest expense in the prior period also included a credit of $8 million for the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.

Equity in earnings of unconsolidated affiliates increased $19 million to $109 million primarily due to higher earnings from the Company’s investment in Wilmar resulting from the increased ownership stake in and higher results from Wilmar, partially offset by lower results from the Company’s equity investment in CIP.

Other income decreased $132 million to $2 million. Current period income includes gains related to the sale of the crop risk services business and disposals of individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business, foreign exchange losses, and changes in contingent settlement provisions. Prior period income included realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B. de C.V. in December 2012, recovery of loss provisions as well as gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors.

37


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the quarter are as follows:

 
Three Months Ended
 
 
 
June 30,
 
 
Segment Operating Profit
2017
 
2016
 
Change
 
(In millions)
Agricultural Services
 
 
 
 
 
Merchandising and Handling
$
40

 
$
(14
)
 
$
54

Milling and Other
58

 
56

 
2

Transportation
11

 
15

 
(4
)
Total Agricultural Services
109

 
57

 
52

 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
198

 
182

 
16

Bioproducts
26

 
(19
)
 
45

Total Corn Processing
224

 
163

 
61

 
 
 
 
 
 
Oilseeds Processing
 

 
 

 
 

Crushing and Origination
38

 
135

 
(97
)
Refining, Packaging, Biodiesel, and Other
83

 
53

 
30

Asia
85

 
47

 
38

Total Oilseeds Processing
206

 
235

 
(29
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
92

 
94

 
(2
)
Total Wild Flavors and Specialty Ingredients
92

 
94

 
(2
)
 
 
 
 
 
 
Other - Financial
27

 
24

 
3

Total Other
27

 
24

 
3

 
 
 
 
 
 
Specified Items:
 
 
 
 
 
Gains (losses) on sales of assets and businesses
8

 
118

 
(110
)
Impairment, restructuring, settlement charges
(26
)
 
(10
)
 
(16
)
Hedge timing effects
2

 
(1
)
 
3

Total Specified Items
(16
)
 
107

 
(123
)
 
 
 
 
 
 
Total Segment Operating Profit
$
642

 
$
680

 
$
(38
)
 
 
 
 
 
 
Adjusted Segment Operating Profit1
$
658

 
$
573

 
$
85

 
 
 
 
 
 
Segment Operating Profit
$
642

 
$
680

 
$
(38
)
Corporate
(259
)
 
(273
)
 
14

Earnings Before Income Taxes
$
383

 
$
407

 
$
(24
)

1 Adjusted segment operating profit is segment operating profit excluding specified items.


38


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Agricultural Services operating profit increased 91%. Merchandising and Handling operating results increased primarily due to strong carries in wheat, corn, and soybeans in North America. Global Trade generated solid results and was up over the year-ago quarter, benefiting from improved margins, favorable timing effects, and actions to improve performance. Milling and Other results increased, driven by steady margins and favorable merchandising results. Transportation results decreased due to river conditions and lower freight rates.

Corn Processing operating profit increased 37%. Sweeteners and Starches operating profit increased due to higher volumes and improved margins in North America. Bioproducts results increased over a weak prior year, with an improvement in ethanol margins

Oilseeds Processing operating profit decreased 12%. Crushing and Origination operating profit decreased from the prior year’s quarter due to weak margins in both global soybean crush and South American origination. The softseeds business capitalized on higher softseeds margins by utilizing its global flex capacity. Refining, Packaging, Biodiesel, and Other operating profit improved due to solid results in all regions, with South America refined and packaged oils and the global peanut business contributing to strong performance in the quarter. North America Biodiesel results also improved due to unfavorable timing effects in the prior year quarter. Asia results increased on higher earnings from the Company’s investment in Wilmar due to the increased ownership stake in and higher results from Wilmar.

Wild Flavors and Specialty Ingredients operating profit decreased 2% due to weaker results in specialty ingredients, partially offset by operating profit growth in Wild Flavors with strong sales globally.

Other - Financial operating profit increased 13% primarily due to improved results from the captive insurance operations, partially offset by the absence of the Company’s share in the earnings of an equity investment that was sold in the third quarter of fiscal 2016.

Corporate results for the quarter are as follows:

 
Three Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
Change
 
(In millions)
LIFO credit (charge)
$
(9
)
 
$
(88
)
 
$
79

Interest expense - net
(81
)
 
(63
)
 
(18
)
Unallocated corporate costs
(134
)
 
(114
)
 
(20
)
Other charges
(2
)
 
(2
)
 
—

Minority interest and other
(33
)
 
(6
)
 
(27
)
Total Corporate
$
(259
)
 
$
(273
)
 
$
14


Corporate results were a net charge of $259 million this quarter compared to $273 million in last year’s quarter. The effect of changing agricultural commodity prices on LIFO inventory valuation reserves resulted in a charge of $9 million this quarter compared to $88 million in the prior year quarter. Interest expense - net increased $18 million due principally to higher interest rates on short-term debt and the issuance of the $1 billion fixed-rate debt in August 2016 and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Interest expense in the prior period also included a credit of $8 million for the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations. Unallocated corporate costs increased $20 million due principally to increased investments in the Company’s business transformation, IT, and innovation initiatives. Minority interest and other expense increased due to lower results from the Company’s equity investment in CIP.


39


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-GAAP Financial Measures

The Company uses adjusted earnings per share (EPS), adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA), and adjusted segment operating profit, non-GAAP financial measures as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.

Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.

The table below provides a reconciliation of diluted EPS to adjusted EPS for the three months ended June 30, 2017 and 2016.
 
Three months ended June 30,
 
2017
 
2016
 
In millions
 
Per share
 
In millions
 
Per share
Average number of shares outstanding - diluted
574

 
 
 
594

 
 
Net earnings and reported EPS (fully diluted)
$
276

 
$
0.48

 
$
284

 
$
0.48

Adjustments:
 
 
 
 
 
 
 
LIFO charge (credit) - net of tax of $3 million in 2017 and $33 million and 2016 (1)
6

 
0.01

 
55

 
0.09

(Gains) losses on sales of assets and businesses - net of tax of $30 million in 2017 and $17 million in 2016 (2)
22

 
0.04

 
(101
)
 
(0.17
)
Asset impairment, restructuring, and settlement charges - net of tax of $7 million in 2017 and $4 million in 2016 (2)
21

 
0.04

 
8

 
0.01

Total adjustments
49

 
0.09

 
(38
)
 
(0.07
)
Adjusted net earnings and adjusted EPS
$
325

 
$
0.57

 
$
246

 
$
0.41


(1) Tax effected using the Company’s U.S. effective tax rate.
(2) Tax effected using the U.S. and other applicable tax rates.
















40


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the three months ended June 30, 2017 and 2016.
 
Three months ended June 30,
 
 
(In millions)
2017
 
2016
 
Change
Earnings before income taxes
$
383

 
$
407

 
$
(24
)
Interest expense
86

 
65

 
21

Depreciation and amortization
227

 
223

 
4

LIFO
9

 
88

 
(79
)
(Gains) losses on sales of assets and businesses
(8
)
 
(118
)
 
110

Asset impairment, restructuring, and settlement charges
28

 
12

 
16

Adjusted EBITDA
$
725

 
$
677

 
$
48

 
 
 
 
 
 
 
Three months ended June 30,
 
 
(In millions)
2017
 
2016
 
Change
Agricultural Services
$
159

 
$
107

 
$
52

Corn Processing
314

 
247

 
67

Oilseeds Processing
256
 
285
 
(29
)
Wild Flavors and Specialty Ingredients
115

 
117

 
(2
)
Other - Financial
32

 
26

 
6

Corporate
(151
)
 
(105
)
 
(46
)
Adjusted EBITDA
$
725

 
$
677

 
$
48



41


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Market Factors Influencing Operations or Results in the Six Months Ended June 30, 2017

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. In Agricultural Services, U.S. grain sales volumes improved on better margins. Overall low market volatility continued due to surplus in the global market. In Corn Processing, demand and prices for sweeteners and starches remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, U.S. industry ethanol production also remained at high levels limiting margins. Global oilseeds processing volumes were strong, although soy margins have been pressured due to slow meal demand growth due to competing proteins. Softseed crushing margins were improved earlier in the year but have trended lower in the second quarter. Slow selling by farmers in Brazil continues to depress grain origination margins despite strong export volumes. Demand and margins for refined oil remained solid across all regions. Wild Flavors and Specialty Ingredients benefited from strong demand for flavor ingredients and flavor systems, specialty proteins, and edible bean products, but continued to be adversely affected by soft market conditions in certain non-flavor food ingredient markets.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Net earnings attributable to controlling interests increased $101 million to $615 million. Segment operating profit of $1.3 billion in the current period was comparable to the prior period. Included in segment operating profit in the current period is a net charge of $18 million consisting of a net gain on sales of businesses, impairment, restructuring, and settlement charges, and corn hedge timing effects. Included in segment operating profit in the prior period is income of $107 million consisting of a net gain on sales of assets and businesses/revaluation, impairment, restructuring, and settlement charges, and corn hedge timing effects. Adjusted segment operating profit increased $0.2 billion to $1.3 billion, due to improved global merchandising results and solid results in Corn Processing, partially offset by weaker South American origination margins, lower soybean crush margins, and weaker results in some specialty ingredients. Corporate results were a charge of $477 million for the six months compared to $540 million the same period last year. Corporate results for the six months include a credit of $4 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to a charge of $102 million the same period last year and a $50 million loss from the Company’s share in the results of its equity investment in CIP’s updated portfolio valuations in the first quarter of 2016.

Income taxes increased $31 million due to higher earnings before income taxes, partially offset by a lower effective tax rate. The Company’s effective tax rate for the six months ended June 30, 2017 decreased to 26.9% compared to 27.3% for the six months ended June 30, 2016, primarily due to the forecasted geographic mix of pre-tax earnings and the effect of certain discrete adjustments, partially offset by the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.
 
Analysis of Statements of Earnings

Processed volumes by product for the six months are as follows (in metric tons):

 
Six Months Ended
 
 
June 30,
 
 
(In thousands)
2017
 
2016
 
Change
Oilseeds
17,337

 
16,749

 
588

Corn
11,384

 
10,829

 
555

   Total
28,721

 
27,578

 
1,143


The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions. Processed volumes of oilseeds increased due to the strong demand environment for soybean meal and canola oil. The overall increase in corn is due to the strong demand environment for ethanol partially offset by the production disruption in one of the Company’s plants due to a water pipe leak in the first quarter.




42


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Revenues by segment for the six months are as follows:

 
Six Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
Change
 
(In millions)
Agricultural Services
 

 
 

 
 

Merchandising and Handling
$
11,169

 
$
11,185

 
$
(16
)
Milling and Other
1,384

 
1,571

 
(187
)
Transportation
101

 
111

 
(10
)
Total Agricultural Services
12,654

 
12,867

 
(213
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
2,105

 
2,004

 
101

Bioproducts
2,413

 
2,555

 
(142
)
Total Corn Processing
4,518

 
4,559

 
(41
)
 
 
 
 
 
 
Oilseeds Processing
 
 
 
 
 
Crushing and Origination
7,185

 
7,139

 
46

Refining, Packaging, Biodiesel, and Other
4,039

 
3,810

 
229

Asia
130

 
147

 
(17
)
Total Oilseeds Processing
11,354

 
11,096

 
258

 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
1,210

 
1,272

 
(62
)
Total Wild Flavors and Specialty Ingredients
1,210

 
1,272

 
(62
)
 
 
 
 
 
 
Other - Financial
195

 
219

 
(24
)
Total Other
195

 
219

 
(24
)
Total
$
29,931

 
$
30,013

 
$
(82
)

Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.

Revenues decreased $0.1 billion to $29.9 billion due to lower average sales prices ($0.1 billion), including $0.2 billion in foreign currency translation impacts. Agricultural Services revenues decreased 2% to $12.7 billion due to lower average sales prices ($0.4 billion) partially offset by higher sales volumes ($0.2 billion). Corn Processing revenues were relatively in line with the prior period. Oilseeds Processing revenues increased 2% to $11.4 billion due to higher average sales prices ($0.4 billion) partially offset by lower sales volumes ($0.2 billion). Wild Flavors and Specialty Ingredients revenues decreased 5% to 1.2 billion due to lower average sales prices ($0.1 billion).

Cost of products sold decreased $0.3 billion to $28.2 billion due principally to lower average commodity costs, including $0.2 billion in foreign currency translation impacts. Included in cost of products sold is a credit of $4 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $102 million in the prior year’s period. Manufacturing expenses increased $0.1 billion to $2.6 billion due to higher salaries and benefits and increased expenses for gas and operating and maintenance supplies.


43


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Gross profit increased $0.2 billion to $1.8 billion. The increase in gross profit consists principally of higher results in merchandising and handling ($54 million), sweeteners and starches ($33 million), ethanol ($53 million), and peanuts ($20 million), partially offset by lower results in soybean processing ($112 million). These factors are explained in the segment operating profit discussion on page 46. Current period gross profit includes a credit of $4 million from the effect of changing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $102 million during the same period last year. The decrease in underlying commodity prices from the prior year did not result in a significant decrease in margins or gross profit as lower underlying commodity prices had a relatively equal impact on revenues and cost of products sold.

Selling, general, and administrative expenses increased $0.1 billion to $1.1 billion due principally to higher salaries and benefits cost related to increased investments in the Company’s business transformation, IT, and innovation initiatives and higher bonus accruals.

Asset impairment, exit, and restructuring costs increased $8 million to $33 million. Current period charges consisted of $8 million of asset impairments and $7 million of restructuring charges in the Agricultural Services segment, $6 million of fixed asset impairments in the WFSI segment, $5 million of other individually insignificant asset impairments, and $7 million of other restructuring charges. Prior period charges included $11 million of software impairment in Corporate, $5 million of asset impairments in the Corn Processing segment, and $9 million of other individually insignificant fixed asset impairments and restructuring charges.

Interest expense increased $32 million to $167 million due principally to higher interest rates on short-term debt, the issuance of the new $1 billion fixed-rate notes in August 2016, and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Interest expense in the prior period also included a credit of $8 million for the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.

Equity in earnings of unconsolidated affiliates increased $126 million to $281 million primarily due to higher earnings from the Company’s investment in Wilmar resulting from the increased ownership stake in and higher results from Wilmar and improved results from the Company’s equity investment in CIP, partially offset by decreased earnings resulting from the disposal of an equity investment.

Other income decreased $125 million to $9 million. Current period income includes gains related to the sale of the crop risk services business and disposals of individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business, foreign exchange losses, and changes in contingent settlement provisions. Prior period income included realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B de C.V. in December 2012, recovery of loss provisions as well as gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Wild Flavors.








44


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Segment operating profit, adjusted segment operating profit (a non-GAAP measure), and earnings before income taxes for the six months are as follows:

 
Six Months Ended
 
 
 
June 30,
 
 
Segment Operating Profit
2017
 
2016
 
Change
 
(In millions)
Agricultural Services
 

 
 

 
 

Merchandising and Handling
59

 
10

 
$
49

Milling and Other
103

 
104

 
(1
)
Transportation
35

 
19

 
16

Total Agricultural Services
197

 
133

 
64

 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
359

 
323

 
36

Bioproducts
36

 
(31
)
 
67

Total Corn Processing
395

 
292

 
103

 
 
 
 
 
 
Oilseeds Processing
 
 
 
 
 
Crushing and Origination
158

 
255

 
(97
)
Refining, Packaging, Biodiesel, and Other
142

 
132

 
10

Asia
220

 
109

 
111

Total Oilseeds Processing
520

 
496

 
24

 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
167

 
164

 
3

Total Wild Flavors and Specialty Ingredients
167

 
164

 
3

 
 

 
 

 
 

Other - Financial
57

 
61

 
(4
)
Total Other
57

 
61

 
(4
)
 
 
 
 
 
 
Specified Items:
 
 
 
 
 
Gains (losses) on sales of assets and businesses
8

 
118

 
(110
)
Impairment, restructuring, settlement charges
(35
)
 
(12
)
 
(23
)
Hedge timing effects
9

 
1

 
8

Total Specified Items
(18
)
 
107

 
(125
)
 
 
 
 
 
 
Total Segment Operating Profit
1,318

 
1,253

 
65

 
 
 
 
 
 
Adjusted Segment Operating Profit1
1,336

 
1,146

 
190

 
 
 
 
 
 
Segment Operating Profit
$
1,318

 
$
1,253

 
$
65

Corporate
(477
)
 
(540
)
 
63

Earnings Before Income Taxes
$
841

 
$
713

 
$
128


1 Adjusted segment operating profit is segment operating profit excluding specified items.

45


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Agricultural Services operating profits increased 48%. In Merchandising and Handling, North America grain showed better results with strong carries in wheat, corn, and soybeans and good execution volumes amidst strong global demand for U.S. commodities. Global Trade generated solid results benefiting from improved margins, favorable timing effects, and actions to improve performance. Milling and Other decreased due to lower volumes and margins. Transportation results increased due to higher barge volumes, partially offset by river conditions and lower freight rates.

Corn Processing operating profit increased 35%. Sweeteners and Starches operating profit increased due to improved domestic demand and higher volumes and margins from the European business. Bioproducts profit increased due to strong ethanol export demand and improved margins, and improved lysine margins, partially offset by lower volumes caused by a mild winter.

Oilseeds Processing operating profit increased 5%. Crushing and Origination operating profit decreased from the prior period. Higher softseed results in North America and Europe were offset by lower crushing and origination results in South America as the pace of farmer selling was slower than expected. A competitive global protein meal market continued to pressure soybean crush margins. Refining, Packaging, Biodiesel, and Other operating profit increased due to improved results in South American refined and packaged oils and the global peanut business. Solid results in European food oils were offset by timing effects. Asia results increased on higher earnings from the Company’s investment in Wilmar due to the increased ownership stake in and higher results from Wilmar.

Wild Flavors and Specialty Ingredients operating profit increased 2% due to good sales volumes in the Wild Flavors business in Africa and the Middle East and strong sales globally, partially offset by weaker results in specialty ingredients.

Other - Financial operating profit decreased 7% primarily due to the absence of the Company’s share in the earnings of an equity investment that was sold in the third quarter of fiscal 2016, partially offset by improved results from the captive insurance operations.

Corporate results for the six months are as follows:
 
Six Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
Change
 
(In millions)
LIFO credit (charge)
$
4

 
$
(102
)
 
$
106

Interest expense - net
(160
)
 
(131
)
 
(29
)
Unallocated corporate costs
(267
)
 
(219
)
 
(48
)
Other charges
(3
)
 
(13
)
 
10

Minority interest and other
(51
)
 
(75
)
 
24

Total Corporate
$
(477
)
 
$
(540
)
 
$
63


Corporate results were a net charge of $477 million in the current period compared to a net charge of $540 million in the prior period. The effects of increasing commodity prices on LIFO inventory valuations resulted in a credit of $4 million in the current period compared to a charge of $102 million in the prior period. Interest expense - net increased $29 million due principally to higher interest rates on short-term debt and the issuance of the new $1 billion fixed-rate debt in August 2016 and interest related to a prior year foreign income tax amended return, partially offset by the retirement of the $261 million bond that matured in April 2017. Unallocated corporate costs increased $48 million due principally to increased investments in the Company’s business transformation, IT, and innovation initiatives. Other charges in the prior period related primarily to software impairment. Minority interest and other expense decreased due to improved results from the Company’s equity investment in CIP.


46


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-GAAP Financial Measures

The Company uses adjusted earnings per share (EPS), adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA), and adjusted segment operating profit, non-GAAP financial measures as defined by the Securities and Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. Adjusted segment operating profit is segment operating profit adjusted, where applicable, for specified items.

Management believes that adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are useful measures of the Company’s performance because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS, adjusted EBITDA, and adjusted segment operating profit are not intended to replace or be an alternative to diluted EPS, earnings before income taxes and segment operating profit, respectively, the most directly comparable amounts reported under GAAP.

The table below provides a reconciliation of diluted EPS to adjusted EPS for the six months ended June 30, 2017 and 2016.
 
Six months ended June 30,
 
2017
 
2016
 
In millions
 
Per share
 
In millions
 
Per share
Average number of shares outstanding - diluted
576

 
 
 
595

 
 
Net earnings and reported EPS (fully diluted)
$
615

 
$
1.07

 
$
514

 
$
0.87

Adjustments:
 
 
 
 
 
 
 
LIFO charge (credit) - net of tax of $2 million in 2017 and $38 million in 2016 (1)
(2
)
 
—

 
64

 
0.11

(Gains) losses on sales of assets and businesses - net of tax of $30 million in 2017 and $17 million in 2016 (2)
22

 
0.04

 
(101
)
 
(0.17
)
Asset impairment, restructuring, and settlement charges - net of tax of $9 million in 2017 and $9 million in 2016 (2)
29

 
0.05

 
16

 
0.02

Certain discrete tax adjustments
4

 
0.01

 
—

 
—

Total adjustments
53

 
0.10

 
(21
)
 
(0.04
)
Adjusted net earnings and adjusted EPS
$
668

 
$
1.17

 
$
493

 
$
0.83

 
 
 
 
 
 
 
 
(1) Tax effected using the Company’s U.S. effective tax rate.
(2) Tax effected using the applicable tax rates.














47


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The tables below provide a reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the six months ended June 30, 2017 and 2016.
 
Six months ended June 30,
 
 
(In millions)
2017
 
2016
 
Change
Earnings before income taxes
$
841

 
$
713

 
$
128

Interest expense
167

 
135

 
32

Depreciation and amortization
452

 
452

 
—

LIFO
(4
)
 
102

 
(106
)
(Gains) losses on sales of assets and businesses
(8
)
 
(118
)
 
110

Asset impairment, restructuring, and settlement charges
38

 
25

 
13

Adjusted EBITDA
$
1,486

 
$
1,309

 
$
177

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
(In millions)
2017
 
2016
 
Change
Agricultural Services
$
296

 
$
234

 
$
62

Corn Processing
580

 
471

 
109

Oilseeds Processing
619

 
594

 
25

Wild Flavors and Specialty Ingredients
214

 
209

 
5

Other - Financial
64

 
65

 
(1
)
Corporate
(287
)
 
(264
)
 
(23
)
Adjusted EBITDA
$
1,486

 
$
1,309

 
$
177




48


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources

A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business.  The Company’s strategy involves expanding the volume and diversity of crops that it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. The Company depends on access to credit markets, which can be impacted by its credit rating and factors outside of the Company’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance the Company’s operations, capital expenditures, and advancement of its growth strategy is cash generated by operations and lines of credit, including a commercial paper borrowing facility.  In addition, the Company believes it has access to funds from public and private equity and debt capital markets in both U.S. and international markets.

At June 30, 2017, the Company had $0.7 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.6 to 1. Included in working capital is $4.9 billion of readily marketable commodity inventories. Cash provided by operating activities was $1.3 billion for the six months compared to a use of $0.4 billion the same period last year. Working capital changes increased cash by $0.3 billion for the six months compared to a decrease of $1.4 billion for the same period last year. Trade receivables decreased $0.3 billion due to lower revenues. Inventories declined approximately $1.1 billion due to lower inventory quantities partially offset by higher prices. Trade payables declined approximately $0.8 billion principally reflecting seasonal cash payments for North American harvest-related grain purchases. Cash used in investing activities was $0.6 billion for the six months compared to $0.8 billion the same period last year. Sales of marketable securities, net of purchases, of $0.1 billion for the six months were comparable to the same period last year. Capital expenditures and net assets of businesses acquired were $0.6 billion for the six months compared to $0.5 billion the same period last year. Investments in and advances to affiliates include the additional investment in Wilmar of $0.2 billion for the six months compared to $0.5 billion the same period last year. Cash used in financing activities was $0.9 billion for the six months compared to cash provided of $0.6 billion the same period last year. Commercial paper borrowings for the six months were $0.2 billion compared to $1.5 billion the same period last year. Share repurchases of $0.5 billion for the six months were comparable to the same period last year.

At June 30, 2017, the Company’s capital resources included net worth of $17.4 billion and lines of credit, including the accounts receivable securitization programs, totaling $6.7 billion, of which $5.1 billion was unused. The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) was 26% at June 30, 2017 and 27% at December 31, 2016. The Company uses this ratio as a measure of the Company’s long-term indebtedness and as an indicator of financial flexibility. Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was $0.2 billion of commercial paper outstanding at June 30, 2017.

As of June 30, 2017, the Company had $433 million of cash and cash equivalents, $379 million of which is held by foreign subsidiaries whose undistributed earnings are considered permanently reinvested. Based on the Company’s historical ability to generate sufficient cash flows from its U.S. operations and unused and available U.S. credit capacity of $4.1 billion, the Company has asserted that these funds are permanently reinvested outside the U.S.

The Company has accounts receivable securitization programs (the “Programs”) with certain commercial paper conduit purchasers and committed purchasers. The Programs provide the Company with up to $1.5 billion in funding against accounts receivable transferred into the Programs and expands the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 16 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures on the Programs). As of June 30, 2017, the Company utilized $1.2 billion of its facility under the Programs.

For the six months ended June 30, 2017, the Company spent approximately $0.5 billion in capital expenditures, $0.2 billion in acquisitions, $0.2 billion in additional Wilmar investment, $0.4 billion in dividends, and $0.5 billion in share repurchases. The Company has a stock repurchase program and has acquired approximately 11.7 million shares during the six months ended June 30, 2017. The Company has 19.6 million shares remaining that may be repurchased under the program until December 31, 2019.

The Company expects capital expenditures of approximately $1.0 billion during 2017. In 2017, the Company expects aggregate cash outlays of approximately $0.7 billion in dividends and $1.0 billion in share repurchases, subject to strategic capital requirements.




49


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Contractual Obligations and Commercial Commitments

The Company’s purchase obligations as of June 30, 2017 and December 31, 2016 were $9.4 billion and $10.6 billion, respectively.  The decrease is related to obligations to purchase lower quantities of agricultural commodity inventories and lower prices. As of June 30, 2017, the Company expects to make payments related to purchase obligations of $8.1 billion within the next twelve months. There were no other material changes in the Company’s contractual obligations during the quarter ended June 30, 2017.

Off Balance Sheet Arrangements

There were no material changes in the Company’s off balance sheet arrangements during the quarter ended June 30, 2017.

Critical Accounting Policies

There were no material changes in the Company’s critical accounting policies during the quarter ended June 30, 2017.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices as they relate to the Company’s net commodity position, foreign currency exchange rates, and interest rates.  Significant changes in market risk sensitive instruments and positions for the quarter ended June 30, 2017 are described below.  There were no material changes during the period in the Company’s potential loss arising from changes in foreign currency exchange rates and interest rates.

For detailed information regarding the Company’s market risk sensitive instruments and positions, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Commodities

The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in customer preferences and standards of living, and global production of similar and competitive crops.

The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all significant commodity risk positions at quoted market prices for the period, where available, or utilizing a close proxy. The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits and value-at-risk (VaR) limits. VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one-year period. Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.

In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one-year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices. The highest, lowest, and average weekly position together with the market risk from a hypothetical 10% adverse price change is as follows:
  
 
 
Six months ended
 
Year ended
 
 
June 30, 2017
 
December 31, 2016
Long/(Short) (In millions)
 
Fair Value
 
Market Risk
 
Fair Value
 
Market Risk
Highest position
 
$
438

 
$
44

 
$
876

 
$
88

Lowest position
 
(82
)
 
(8
)
 
(529
)
 
(53
)
Average position
 
190

 
19

 
27

 
3


The change in fair value of the average position was principally the result of an increase in average quantities underlying the weekly commodity position.

50



ITEM 4.
CONTROLS AND PROCEDURES

As of June 30, 2017, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

The Company is implementing a new enterprise resource planning (ERP) system on a worldwide basis as part of its ongoing business transformation program, which is expected to improve the efficiency and effectiveness of certain financial and business transaction processes. The implementation is expected to occur in phases over the next several years. The Company has currently implemented changes to certain processes in corporate finance and in over 200 locations, and will continue to roll out the ERP system over the next several years. The Company has appropriately considered these changes in its design of and testing for effectiveness of internal controls over financial reporting and concluded, as part of the evaluation described in the above paragraph, that the implementation of the new ERP in these circumstances has not materially affected its internal control over financial reporting.


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PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

The Company is routinely involved in a number of actual or threatened legal actions, including those involving alleged personal injuries, employment law, product liability, intellectual property, environmental issues, alleged tax liability (see Note 11 for information on income tax matters), and class actions. The Company also routinely receives inquiries from regulators and other government authorities relating to various aspects of our business, and at any given time, the Company has matters at various stages of resolution with the applicable government authorities. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require significant expenditures or result in lost revenues. In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a material loss contingency is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice.

The Company is a party to numerous lawsuits pending in various U.S. state and federal courts arising out of Syngenta Corporation’s (Syngenta) marketing and distribution of genetically modified corn products, Agrisure Viptera and Agrisure Duracade, in the U.S. First, the Company brought a state court action in Louisiana against Syngenta in 2014, alleging that Syngenta was negligent in commercializing its products before the products were approved in China. Second, the Company is a putative class member in a number of purported class actions filed beginning in 2013 by farmers and other parties against Syngenta in federal and state courts, again alleging that Syngenta was negligent in commercializing its products. The federal actions have been consolidated for pretrial proceedings in a multidistrict litigation (MDL) proceeding in federal court in Kansas City, Kansas, and some state actions have been consolidated for pretrial proceedings in MDL in Minnesota state court. In the fourth quarter of 2015, Syngenta filed third-party claims against the Company and other grain companies in these MDLs seeking contribution in the event that Syngenta is held liable in these lawsuits. The federal court in the Kansas MDL dismissed all claims against the Company on April 4, 2016, and the state court in the Minnesota MDL dismissed all claims against the Company on September 6, 2016. Therefore, the Company is no longer a third-party defendant in the federal or state MDL. Third, the Company and other grain companies have been named as defendants in numerous individual and purported class action suits filed by farmers and other parties in state and federal courts beginning in the fourth quarter of 2015, alleging that the Company and other grain companies were negligent in failing to screen for genetically modified corn. As noted, on September 6, 2016, the court in the Minnesota state MDL dismissed all claims against the Company, and on January 4, 2017, a federal court in the Southern District of Illinois similarly dismissed all of the pending complaints against the Company there. Some parties are expected to appeal some or all of these dismissals. Currently, the Company remains a defendant in only certain state court actions by farmers and other parties pending in Illinois state court, which the Company has moved to dismiss as well. The Company denies liability in all of the actions in which it has been named as a third-party defendant or defendant and is vigorously defending itself in these cases. All of these actions are in pretrial proceedings. At this time, the Company is unable to predict the final outcome of this matter with any reasonable degree of certainty, but believes the outcome will not have a material adverse effect on its financial condition, results of operations, or cash flows.

In the second quarter of 2017, the independent third party jointly hired by the Company and Olam International Limited (Olam) to resolve disagreements concerning purchase price adjustments related to the 2015 sale of the Company’s cocoa processing business, issued a confidential decision resolving this matter. At the time the sale closed in 2015, the Company established a reserve based on its best estimate of the most likely settlement of disputed adjustments. During the second quarter of 2017, the Company adjusted the reserve and paid Olam the full and final amount determined by the independent third party.
 
The Company is not currently a party to any legal proceeding or environmental claim that it believes would have a material adverse effect on its financial position, results of operations, or liquidity.

ITEM 1A.
RISK FACTORS

There were no significant changes in the Company’s risk factors during the quarter ended June 30, 2017. For further information about the Company’s risk factors, refer to Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of a Publicly Announced Program (2)
 
Number of Shares Remaining that May be Purchased Under the Program (2)
April 1, 2017 to
 
 
 
 
 
 
 
 
April 30, 2017
 
520,118

 
$
46.156

 
520,118

 
25,284,537

 
 
 
 
 
 
 
 
 
May 1, 2017 to
 
 

 
 

 
 

 
 

May 31, 2017
 
2,592,315

 
42.054

 
2,592,315

 
22,692,222

 
 
 
 
 
 
 
 
 
June 1, 2017 to
 
 

 
 

 
 

 
 

June 30, 2017
 
3,093,496

 
41.881

 
3,093,496

 
19,598,726

Total
 
6,205,929

 
$
42.311

 
6,205,929

 
19,598,726


(1)
Total shares purchased represents those shares purchased in the open market as part of the Company’s publicly announced share repurchase program described below, shares received as payment for the exercise price of stock option exercises, and shares received as payment for the withholding taxes on vested restricted stock awards. During the three-month period ended June 30, 2017, there were no shares received as payments for the minimum withholding taxes on vested restricted stock awards and for the exercise price of stock option exercises.

(2)
On November 5, 2014, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019.
 

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ITEM 6.
EXHIBITS
(3)(i)
 
 
 
 
(3)(ii)
 
 
 
 
(12)
 
 
 
 
(31.1)
 
 
 
 
(31.2)
 
 
 
 
(32.1)
 
 
 
 
(32.2)
 
 
 
 
(101)
 
Interactive Data File


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
ARCHER-DANIELS-MIDLAND COMPANY
 
 
 
 
 
 
 
/s/ R. G. Young
 
R. G. Young
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
/s/ D. C. Findlay
 
D. C. Findlay
 
Senior Vice President, General Counsel, and Secretary

Dated: August 1, 2017

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